Statcounter

July 2018

July 31, 2018

Last year the CSO introduced an innovative measure of national output in order to remove the distorting effects of multi-national activity (re-domiciled companies, R&D and aircraft leasing). It was called modified Gross National Income or GNI*. Now they have modified the modified GNI. And our level of output has been revised downwards.

The recent modification reduced our national output by 10 percent. In other words, we find ourselves 10 percent poorer than we thought.

We have also found ourselves deeper in debt. When measured against GDP, our general government debt was 68 percent last year – below the Eurozone average. However, when measured against the old GNI* our debt level went up to 100 percent. Now we find that our public debt is 111 percent of the new GNI*.

So, poorer and deeper in debt; and now we may find ourselves on the wrong side of the economic cycle. In the years since the end of the recession / stagnation, all our indicators have been in fast growth. This was never going to last; it was a result of pent-up demand and foreign direct investment. Eventually it would settle down. But we may be settling down earlier than we thought – and at a lower level than we thought. Let’s look at two indicators that are fairly detached from multi-national activities: personal consumption (consumer spending) and employment.

Personal Consumption

Personal consumption grew at a steady pace but the increase fell off significantly in 2017.

Consume spending reached 4 percent in 2016. However, growth suddenly cooled off at 1.6 percent. This was not anticipated. Early last year:

It should be noted that in the first quarter of 2018, consumer spending actually fell on the previous quarter:

Employment

We see a similar fall-off in growth in employment. The following measures annual increase up to the first quarter.

We find that total employment growth fell off in the year up to the first quarter in 2018. However, the fall-off was significant in the market economy (essentially the private sector, this excludes public administration, education, health and agriculture). Growth fell by more than half. And if we exclude construction, the fall-off was even more marked.

Again, only the Central Bank expected a fall-off close to this magnitude.

* * *

What does all this mean?

Growth rates immediately coming out of the recession and stagnation were never going to be maintained. They should ease off to more sustainable levels. However, there are signs that the levelling off is occurring earlier than expected and potentially at lower levels than projected.

The easing off of consumer spending and employment could be blips that will correct themselves this year. The Central Bank, while expressing surprise at the low levels of consumer spending last year, is nonetheless confident that it will rise again this year. We will have to wait and see whether the confidence is justified.

What happens if and when all those ‘known unknowns’ come down on us? Brexit, corporate tax reform (coming from the EU and the US), interest rate increases, a looming deficit in the Social Insurance Fund, trade wars, climate change, housing shortages, over-heating, concentration of tax/production in a few multi-nationals, etc.

Then there’s the ‘unknown unknowns’. We can’t break this down because, well, they’re unknown.

There is a fear, understandable given our recent experience, that any of these factors could lead to another recession. However, it doesn’t have to be as dramatic as that. We could enter a period of low-growth – so low that it feels recessionary. In the 1980s it certainly felt like a recession but in actual fact the economy grew during most of that period – it just didn’t grow much.

So let’s look at the Government’s per capita projection for the next three years.

By 2021, real per capita growth will be 1.6 percent. It wouldn’t take much to knock those numbers downwards.

The challenges are considerable. Future fiscal policy will need to engage in debt-reduction, drive investment, close the deficits in our social infrastructure (housing, education, health, etc.), and avoid over-heating – all the while keeping within fiscal rules which even the Department of Finance believes are ‘dangerous’. What a balancing act.

Progressives and trade unionists need to seriously debate the Government's fiscal policy. If we don’t, then we may find them using the same or similar deflationary tools that gave us austerity. And given our experience of that, it wouldn’t be good for vast swathes of working people.

July 17, 2018

What great fun following President Donald Trump’s global tutorial on how to win friends and influence people. Particularly intriguing is Trump’s claim that European members of NATO are not spending enough on ‘defence’ and that they should fast-forward their commitment to increase defence spending to 2 percent of GDP immediately, and even double this target to 4 percent. Throw in a bit of German-bashing and Euro-trashing and it was a great summit.

But this Trump-watching fun masks the dismal fact that global military spending is crowding out the investment necessary to create international stability and security. All the countries of the world spend $1.7 trillion on their militaries (or approximately €1.5 trillion). The US accounts for 35 percent of that spending (it’s expensive maintaining an empire), while Europe accounts for another 20 percent. The world spends 2.2 percent of its GDP on the military – up from 1.6 percent in 2007. In short, these are obscene numbers.

And now the EU is getting involved in this growing military-mania with PESCO: Permanent Structured Cooperation, as in European security and defence. This issue got an outing some time ago in the Dail when TDs debated joining. Proponents sought to present the issue as one of voluntary cooperation on a range of issues, including peace-keeping missions with opt-outs available, while opponents raised important concerns over neutrality and Ireland’s global role.

One doesn’t have to be a fully signed-up peacenik to be concerned about rising military spending in Europe. While PESCO imposes no binding target for total defence spending, there is the NATO target of 2 percent and the institutional entanglement between the two:

‘Enhanced defence capabilities of EU Member States will also benefit NATO . . . A long term vision of PESCO could be to arrive at a coherent full spectrum force package - in complementarity with NATO, which will continue to be the cornerstone of collective defence for its members.’

And then there’s this commitment among signed-up PESCO members:

"Participating Member States subscribe to the following commitments: (1) Regularly increasing defence budgets in real terms, in order to reach agreed objectives."

Of the 20 commitments in the Notification on Permanent Structured Cooperation, increasing military spending is the very first.

To reach 2 percent of GDP spending EU-wide would require a considerable amount of redirecting resources and opportunity costs. There are only three countries that currently spend this amount on the military and one of them – the UK – soon won’t be with us.

Though the Government was quick to point out that signing up to PESCO doesn’t mean that Ireland has to increase it’s spending to 2 percent, we shouldn’t be surprised if pressure is put on individual national defence budgets. Joining PESCO with the commitment to the triple-lock (Government and Dail approval, and UN authorisation before Irish involvement in overseas missions) may seem to provide some cover, but we should be prepared for militarisation-drift. Already, Fine Gael MEPs have called for Ireland to fully join the EU Defence Union.

So what would a 2 percent military spending level mean for the EU as a whole? In 2016, it would have meant and increase of €100 billion, or 50 percent. That is a significant sum.

What about other urgent priorities within the EU?

To return public investment spending to pre-crash levels would require an additional €77 billion; and to make up for the lost years in recession, the increase would be multiples of that.

There are 118 million people in the EU who are at-risk of poverty or social exclusion, with 80 million experiencing deprivation

There are 21 million people unemployed in the EU, of whom 8 million are long-term unemployed

These are just a few of the urgent economic and social priorities that should be addressed, priorities that would be undermined if greater resources are devoted to military spending.

Ireland is seeking a seat on the Security Council. What it wants to do with it is still a bit of a mystery. Here are a couple of ideas:

Put nuclear disarmament and the elimination of all weapons of mass destruction back on the agenda – these are terror weapons that have no place in any country’s armoury

Launch a drive to reduce military spending – in the long- term to 1 percent in each country and re-direct the savings into international social, environmental and economic programmes under the auspices of the UN

Reducing military expenditure is, of course, dependent on resolving the myriad conflicts throughout the world – Palestine, Yemen, Syria, Sudan, Kashmir, Kurdish-Turkish conflict, Armenian–Azerbaijani conflicts, Afghanistan, Pakistan-India hostility, Korea; and the list goes on. It is also about limiting the capabilities of imperialist powers and ventures. In other words, it is about re-establishing the UN, for all its faults, as the driver of peace, conciliation and stability.

But it goes beyond governments and armies. Civil society has a key role in driving change and public opinion. Peace movements have recently been struggling to mobilise social forces: in the US, UK, Israel, Germany, etc. An exception is Japan where there has been mobilisation of support for the de-militarised constitution.

Here, Irish civil society organisations can play a role, based on our historical neutrality, in promoting a new anti-militarisation drive in Europe. There are peace movements throughout Europe and the potential of a pan-European peace initiative - centred on demands to remove WMDs from European soil, to redirect military spending to social programmes, and to pursue non-offensive defence strategies – could help mobilise public opinion away from militarisation.

‘In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes.’

The Departments of Education & Skills and Children & Youth Affairs reported no one in their departments earning below the Living Wage. The Department of Transport, Tourism & Sport is still collating the answer.

In total, it would cost €5.7 million to implement the Living Wage in Government departments. That the figure is higher for some departments is not due to different pay treatment (they are all covered under the same pay agreements) but, rather, due to the number employed in different grades.

The response to Deputy Kelleher’s question on public agencies funded by the various Departments was patchy, with almost all Ministers stating that they would respond to him directly when they get the information. Hopefully, the Deputy will publish this data when he receives it. However, Public Expenditure & Reform did respond: the cost of implementing the Living Wage in the Public Appointments Service, State Labs, the Office of the Ombudsman and the Office of Government Procurement is €308,000.

The Irish Times reports that just under 1,000 civil servants are paid below the Living Wage. It further states that 6 percent of all public sector workers – 19,000 – are paid less than €25,000 per year. The annual Living Wage for 2018 was €24,200 – so not all those workers would be below the Living Wage.

This raises three points. First, the cost of implementing the Living Wage for the employees covered under the Parliamentary Questions would be a fraction of a fraction (less than 0.1 percent of the public sector payroll). To bring all public sector employees up to the Living Wage would cost €38 million and probably less (assuming an average of €2,000 per year for the 19,000). Bringing all employees in Government departments and agencies above the Living Wage could provide an example to the private sector – what is called the ‘demonstration effect’.

Second, this shows the benefit of collective bargaining and negotiated wages. Wage inequality in those sectors which are covered by collective bargaining is less than sectors where employers refuse to acknowledge workers’ desire to bargain together. Indeed, that relative few employees in the public sector are currently below the Living Wage and the cost of addressing this would be so minimal is a testament to that (back in 2013 NERI estimated 26 percent of the total in work earned below the Living Wage). And recent examples of this egalitarian approach are the flat-rate pay increases public sector unions negotiated in pursuit of pay restoration. Such strategies provide extra benefit to those on low-pay.

Third, if we had a strong cross-party Living Wage campaign (the Living Wage Technical Group is not a campaigning group; they focus on calculating the Living Wage), a short-term focus would be the wider public sector and publicly subsidised organisations – departments, local authorities, public agencies, hospitals, schools, subsidised organisations. This could also be extended to companies that contract with the Government – public sector procurement. This is how many Living Wage campaigns got off the ground in the US. The advantage here is that there is more accountability in these organisations and, again, would provide a demonstration effect to the private sector.

This would be a small but important step in implementing the Living Wage. And the more success we have with each small step, the stronger we will be in pursuing a Living Wage for all employees.

July 10, 2018

Put the cat out, pop the popcorn and pull up a chair: the great pre-budget tax debate is commencing. For the past few years we have heard that our income taxes are high, very high, too high and this is creating all sorts of economic havoc. Enjoy the show.

One example of this is the claim that Irish taxpayers enter the top rate of tax earlier than any other EU country (bar Denmark). This is true – but the claim that this shows Ireland has high income taxes ignores two issues.

First, in many EU countries low-paid workers pay a much higher marginal tax rate (marginal tax rate is the tax you pay on the next Euro you earn; it is not the effective tax rate – that is, the tax paid as a percentage of income): For example, at €30,000, Austrians pay 35 percent marginal income tax rate while Belgians pay 40 percent; and this doesn’t include much higher social insurance (PRSI) rates. In Ireland, taxpayers pay only 25.5 percent. So, yes, Irish taxpayers enter the top rate of tax earlier than Austria and Belgium – but they pay much lower marginal tax rates on lower income.

A second issue is that most other EU countries have more than two tax rates; therefore, their taxpayers progress through a number of tax rates before reaching the top. Ireland has only two rates (discounting USC): 20 and 40 percent. For instance:

Austria has six tax rates – from 25 percent at entry level to 50 percent at the top

Belgium has five tax rates – again, from 25 to 50 percent

France has four tax rates – from 14 to 45 percent

Netherlands has four rates – from 8.9 to 52 percent

Luxembourg tops them all – with 18 tax rates from 8 to 38 percent. The point here is that the reason Irish taxpayers enter the top rate of tax early is that there are no intermediate rates between entry and top level.

But you won’t hear any of this in the debate. You’ll get sound-bites and ‘oh, isn’t this terrible’; but an analysis of comparative tax structures will be lacking.

Fortunately, we can make relatively robust comparisons between Irish personal tax levels and other EU countries courtesy of Eurostat’s informative Taxation Trends in the European Union. The two ways of measuring this tell similar stories.

First, we look at employees’ personal tax (including social insurance and sur-taxes like the USC) as a percentage of gross, or aggregate, wages.

We find that personal taxation on Irish employees is slightly higher than our peer-group average. It ranks 4th and is ahead of ‘high-tax’ Sweden (which surprises many). When we look at employees’ personal tax as a percentage of national income we see a similar story.

In this measurement we see Ireland (using the CSO’s special GNI*) falling below our peer-group average – but only marginally so. These measurements do not speak to the progressivity of different tax systems – they just take the total amount of personal tax revenue as a proportion of wages and national income.

In essence, both these measurements show that Irish employees’ personal taxation is approximately average.

We will still hear arguments – about how the Irish personal taxation system is a disincentive to employment creation. The broad parameters of the tax system have not changed in the last four years, although there has been a slight reduction in marginal tax rates with the cuts to USC. And yet during that period employment has increased by 270,000, or 14 percent. That doesn’t look like much of a disincentive.

Or your will hear that our tax system is a disincentive to earning more. Yet, in the last four years we see the weekly income of managers and professionals – who are likely to be in the top tax rate – rise by 11 percent compared to an economy-wide average of five percent. Again, the tax system doesn’t seem to be a disincentive to top rate taxpayers.

Could we devise a more efficient taxation system? Yes, of course. Is personal taxation a priority in this budget? No. We are an average personal–taxed economy, and clearly our structure is not a disincentive to employment creation and wage increases.

The priorities lie in housing, childcare and education; in infrastructural deficits; in the quality of our public services and in a social protection system that can provide security to everyone – including those in the workforce.

July 04, 2018

The Living Wage Technical Group has today produced the hourly Living Wage for 2018: €11.90 - a 20 cents rise over last year. Since the Living Wage was first launched in 2014, it has increased from €11.45 – a 4 percent increase. What has been driving this increase?

One word: housing.

The Living Wage is constructed on the work of the Vincentians’ Minimum Essential Standard of Living with some variations introduced by the Technical Group. This is a comprehensive and detailed breakdown of the cost of all goods and services that go into a minimum living standard. When we separate out housing costs from the rest of the expenditure (food, transport, health, utilities, etc.) we can see the issue.

In the four years, housing costs increased by 37 percent. All other costs fell by -4 percent.

This leads us to a particular insight: if general pay increases in the economy are merely going to pay higher rents or higher house prices, then employers are essentially subsidising economic rents, whether to a landlord or developers / financial institution. This is a drain on the productive economy and leaves many people’s living standards no better off except that they may have kept pace with housing costs.

For many people the solution is to increase the minimum wage to the level of the Living Wage. This would require an hourly increase of €2.35 or 25 percent. Leave aside the issue of whether this would be feasible without employment or working time loss (just to note: the ESRI found that the 50 cents increase in the minimum wage in 2016 had no negative impact on employment). The Living Wage, while expressed in an hourly payment, is actually based on a full-time worker (39 hours per week). Therefore, the Living Wage is:

Weekly: €469

Annual: €24,444

Anything less than those benchmarks and workers fall below the Living Wage. So someone may be paid, on an hourly basis, above the Living Wage. But if they only work 35 hours, they may be below the weekly and annual Living Wage.

This is important because there is evidence from the US that businesses facing substantial increases in the minimum wage are cutting back hours and forcing more work on to employees. In this way, firms can ease the increase in overall payroll.

When the minimum wage in Ireland jumped by 50 cents in 2016 there was anecdotal evidence that in the hospitality sector some workers faced higher targets (mattress changing, room cleaning). All this to say that without strong labour protection some employers may attempt to clawback minimum wage increases by sweating labour.

This suggests that we need a broader, multi-pronged strategy in order make the Living Wage a living fact. I would suggest three areas:

First, reduce high living costs which would reduce the Living Wage. For instance, if rents increased by just half the pace they did over the last four years the Living Wage would be lower. There are other living costs that could be reduced:

Public transport fares: we have one of the least subsidised public transport systems in Europe, resulting in high fares and a poorer service. Increased subventions would mean lower fares.

Communications: yes, Ireland is a high-cost country. Consumer prices are 17 percent higher than EU-15 levels. But why is communication 24 percent higher? It would be helpful if the Government commissioned a study into all prices to get a real handle on the reason for our high living costs – rather than assume that current market pricing is somehow ‘natural’.

Second, provide for collective bargaining at company and sectoral level. The Irish private sector is generally low-paid compared to our EU peer-group. It also has much lower collective bargaining coverage. This is especially so in the low-paid sectors – retail and hospitality – where Irish pay and collective bargaining levels are even further down the EU table. By providing workers with the tools to bargain together, they can drive up wages consistent with the company’s ability to pay and, so, bring workers closer to the Living Wage. Further, workers can better protect themselves collectively if employers try to claw back wage increases by degrading working conditions.

Third, the minimum wage does have a role but what is needed is a more robust approach. For example, minimum wage increases could be linked to overall wage increases in the private sector but instead of expressing them in percentage terms, they could be expressed in terms of a flat-rate pay increase or a combination of the two. This would use general wage increases as parameters but express the increase in terms of an egalitarian calculation. In this way, the minimum wage would rise as a proportion of the average or median wage.

This three-pronged approach would help bring workers above the Living Wage while reducing living costs, which would be a benefit to all workers and the productive economy.

In short, the drive to achieve the Living Wage for all workers must take place at a social level (living costs), in the workplace (stronger workers’ rights) – both combined with a solidarity minimum wage strategy.

This broad-based strategy can help make the Living Wage a living fact.

July 02, 2018

The Government in its Summer Economic Statement has confirmed what they set out in the National Development Plan – a substantial increase in public investment.The Government intends to increase capital spending from €5.8 billion in 2017 to €9.4 billion by 2021.This is substantial.That’s the good news.The bad news is that people will end up paying for it through squeezed public services.Essentially, between now and 2021, there will be no real increase in public service expenditure.

Irish spending on public services never reached the average of our peer group, never mind the average of other small open economies – even during the go-go boom days.In 2017 public spending on public services would have to

·Increase by 21 percent, or €7.6 billion to reach the average of our EU peer-group

·Increase by 34 percent or a staggering €11.9 billion

If anything, the next few years will be worse.Between 2017 and 2019, Irish public services spending will fall from 17.6 percent of GNI* to 16.8 percent; in our EU-peer group spending will remain constant at just above 22 percent.And out to 2021, the Government is projecting a further fall – to 16 percent of GNI*.

What does this mean in actual Euros and cents?The headline figures show an actual increase in public services spending:€3.6 billion or 10 percent between 2017 and 2021.However, factor in the projected 5.5 percent inflation rate (GDP deflator) and, according to the IMF, a 4 percent population increase (nearly 200,000) – and the real increase becomes almost non-existent.

These are just projections and the Government has considerable resources (see here) to increase public service spending over the next three years; therefore, annual expenditure might be smoothed out on the upside.So this could be treated as a base-line.If so, then it is a desultory base-line.

Between 2017 and 2021, real (after inflation) spending will rise by €34 per person.In effect, spending will stagnate.

And it will stagnate at a time of increasing demographic pressure.The number of pensioners is rising fast – in fact, Ireland has the fastest growing over- 65 years demographic in our peer group, though starting from a low base.

As well, we have the fastest rising youth demographic.

Combined, we will need additional age-related expenditure (health for elderly people, education for children) just to stand still.As it stands now, we are falling backwards.And going further, establishing public services on a par with other European countries is not even on the agenda.

There is a consensus that we need to boost public investment.And, yes, economics is about the art (not science, never science) of allocating scarce resources efficiently.So we might get the argument that the priority is investment and, unfortunately, public services will have to wait.

However, this misunderstands the relationship between public services and the productive economy.We need to boost spending on education and R&D – human capital. We need affordable, quality and professional childcare – drive labour force participation.We need fair public transport fares as part of an ambition to move away from private transport – mobility, climate change.And we need an efficient and effective healthcare system – illness and injury play hell with productivity (never mind life quality).

So it is not so easy to distinguish between capital investment and current expenditure in terms of its impact on the productive economy.But it is very easy to understand the impact of stagnating and sub-optimal public services on living standards.

The Government is attempting to pay for public investment, in order to boost living standards and the productive economy, by squeezing public services and, so, living standards and the productive economy.